Grow Ahead of the Curve

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I’ve written a couple of times about the emergence of the Exchange Traded Managed Funds – which to complicate things, have also been going by the moniker Exchange Quoted Managed Funds (EQMFs). Confused?

All is not lost…today I learned that ASIC has continued its support of this emerging sector by allowing fund managers to refer to these products as Active ETFs (exchange traded funds). I love it when common sense rules the day.

Active ETFs are an exciting development in the world of funds management, albeit one currently restricted to Australia. In other parts of the world, fund managers may well be nervous at the continued domination of passive ETFs. However here down under, Active ETFs ensure the bell is not tolling for active funds management just yet.

A relatively new vehicle, Magellan is widely credited with doing the heavy lifting with the regulator to pave the way for a listed managed fund that is actively managed. While Magellan’s hard work paid off for the organisation (just shy of its second birthday, Magellan's Global Equities Fund (ASX:MGE) has raised over $700 million), it’s also opened the door for a growing number of managers seeking to list versions of their existing (active) managed funds.

Active ETFs are not restricted to a single asset class or vanilla strategies; a recent entrant is Schroder's GROW (ASX:GROW), the listed version of theSchroders Real Return CPI + 5% Fund, a multi-asset strategy that offers a largely unconstrained asset allocation between growth, diversifying and defensive assets.

Like the managed fund – and unlike most passive ETFs – GROW is not managed to a benchmark; it has a targeted performance objective of CPI + 5% over rolling three year periods. It’s an open-ended fund, issuing and cancelling units daily as required, and Schroders has taken the role of market maker to protect its intellectual property and ensure liquidity for investors.

The active managed fund versus the Active ETF

With the same management team, the same real return investment strategy, asset allocation and fee structure, why would an investor choose GROW over its unlisted counterpart?

Schroder's RR CPI+ 5%

Managed Fund

GROW

Pricing

Each day’s buy and sell price is struck the following business day

Priced every 15 seconds, with the price available online

Accessibility

Involves a lengthy application form

Online transaction and execution via broking platform

Transacting

Paperwork required for additional investment or withdrawals

Investors buy or sell units in the secondary market

Minimum investment

$25,000

Stipulated by broker, for example, OpenMarkets has a minimum of $500

Settlement

Units are issued and investors receive a standalone transaction statement

Settlement occurs via CHESS like any other exchange traded security; holdings recorded on investor’s HIN

SMSFs

Schroders requires sight of trust deed, birth record and other paperwork

Simply transact on fund's HIN. (Brokers verify ID and trust on establishment of the HIN.)

A GROWth story?

Since its launch in August 2016, GROW has been experiencing increasing inflows, so far raising more than $25 million. Importantly, it has good distribution across online and full service brokers.

GROW encapsulates the concept of ‘objective based investing’; it starts with the objective rather than an arbitrary benchmark index or strategic asset allocation, and is generally focused on generating a return above Australian inflation (which is referred to as a ‘real’ return). After all, if your returns don’t beat inflation, you might as well keep your money stashed under your mattress.

According to Schroders, diversifying investments is crucial to delivering more reliable returns, especially given the unpredictability of markets. Many investor portfolios tend to have very high exposures to the same themes, very low protection from certain risks and overall little true diversification. It’s not surprising that investors using primarily listed investments have significant exposure to Australian equities and according to OECD research, the average super account holds more than 50% equities.

Check out Oliver Trusler, Investment Director at Schroders talk further about GROW.

True diversification is a portfolio with a broad range of exposures. Active ETFs such as GROW make investment a level playing field; all investors can access a diversified portfolio of securities in the listed environment, and with a relatively small outlay. That’s what I call equal opportunity investing.

General Advice WarningThe information provided in this post is general information only and is not designed for the purpose of providing personal, financial or investment advice. Any examples are presented for illustration purposes and past performance is not a reliable indicator of future performance. The information provided does not take into account your particular investment objectives, financial situation or investment needs.

Tracey Franks is one of OpenMarkets' regular blog contributors and content writers, who has worked in financial services for over 20 years in businesses spanning stockbroking, funds management, research and consulting, as well as financial planning. When not writing about finance-related topics, Tracey is working on her first novel.